The Case for Optimism: Our Top 25 Dividend Growth Stocks are Dirt Cheap

Anyone who had recently invested in real estate would most likely agree that
the phrase "dirt cheap" carries a new and enhanced meaning today. In the same
vein, we would argue that our top 25 dividend growth stocks based on the potential
for five-year estimated annual total returns are dirt cheap. Consequently,
we believe that most of the bad news is already priced in, and therefore, the
opportunity to buy low is the best it's been since 1997.

Negative Sentiment Focused on the Macro

Mainstream media, the markets, and it seems the entire world, is obsessively
focused on numerous macro-oriented headwinds. This has led to extreme pessimism
and fear-driven behavior on the part of investors. Moreover, this has caused
some of the highest quality companies on the planet to become cheaper than
they have been in decades, and more importantly, we would argue cheaper than
they deserve to be. There certainly is a lot of bad news; on the other hand,
there is always a lot of bad news for markets to deal with. This gives credibility
to the old stock market adage: "The market climbs a wall of worry."

Wall Street's Walls of Worry During the 20th and 21st Centuries

Let's take a brief journey down memory lane and list and highlight some of
the most memorable crises during the 20th and 21st centuries. We will start
with the panic of 1901 that caused the first stock market crash. Next was the
1907 Bankers' Panic leading to numerous bank failures. Then the Sherman Antitrust
Act brought us the panic of 1910 to 1911. Also, in 1910 the Shanghai China
Rubber Market collapsed leading to numerous bank failures in China. And, of
course, in 1929 we had the Great Depression and the catastrophic Stock Market
Collapse.

Things were pretty benign for a while until 1973 brought us the oil crisis
which caused the 1973 to 1974 market collapse that eventually spread to a banking
crisis in the United Kingdom. Calendar year 1982 brought us the Mexican Weekend
and the famed Latin American debt crisis that declared all of Latin American
debt unmanageable. Then in 1983 Israel nationalized its four largest banks
after they collapsed. Calendar year 1987 brought us Black Monday and the largest
one-day percentage decline in stock market history. This was followed by the
United States Saving & Loan crisis a few years later from 1989 to 1991.
And in between then and 1990, the Japanese asset price bubble collapse made
worldwide front page news.

Sweden and other Scandinavian countries followed suit with their own banking
crisis during the early 1990s. Calendar years1992 to 1993 brought us Black
Wednesday where the British government was forced to remove the British sterling
from the ERM (the European Exchange Rate Mechanism), which incidentally made
currency speculator George Soros a billionaire by shorting the sterling. Then
we had another Mexican crisis in 1994 and 1995 with the devaluation of the
peso. But not to be outdone by Mexico we had the 1997 - 1998 Asian Financial
Crisis that devalued their currencies and threatened banks all across Asia
raising fears of an economic worldwide meltdown due to financial contagion.
Then, and finally, the 20th century ended with the 1998 Russian financial crisis
and the devaluing of the ruble and Russia defaulting on their debt.

This brought us into the 21st century where in early 2000 and 2001 we had
the Turkish Crises and the Argentine Crises. But even more memorably, the 2001
U.S. recession brought us the dot-com collapse which abruptly ended the infamous
irrational exuberant period that started in 1995. And, of course, we are still
reeling from the 2007 to 2010 financial crisis which is easily the mother of
today's pessimism. And finally, we are now faced with the European sovereign
debt crisis that we are all worried about today.

This has only been a brief listing and look at many of the crises of the 20th
and 21st centuries. There were many more in previous centuries, and there will
certainly be many more to come. However, through it all, the world and all
the world economies have found ways to survive and even prosper. Perhaps most
importantly of all, the one thing that each of these crises has in common is
the creation of massive wealth and numerous millionaires and billionaires who
had the courage and foresight to invest appropriately. We don't believe it's
smart to bet against the indomitable human spirit.

As Napoleon Hill in his best-selling book Think and Grow Rich so aptly
put it: "in every adversity lies the seed of a greater or equivalent benefit. " With
these words of wisdom in mind, we believe that a primary benefit resulting
from today's financial issues are cheap stock prices. Furthermore, we believe
this especially applies to high-quality dividend growth stocks, many of which
are currently selling at PE ratios significantly below their historical norms.
Low valuations on strong companies with attractive growth prospects, has always
provided a reliable and safe opportunity for conservative investors to build
long-term wealth.

The following portfolio review lists our top 25 blue-chip dividend growth
stocks listed in order of highest potential future returns to the lowest. In
order to make this list, each company had to possess several critical attributes.
First they had to be available at current valuations that were significantly
below their historical norms. And very importantly, each company had to have
remained profitable through the great recession of 2008 and 2009.

In other words, we wanted companies that were proven strong enough to withstand
tough economic times. Although some of the companies on the list experienced
minor profit drops during the great recession, they nevertheless remained profitable
and viable enterprises. Consequently, most of them were able to increase their
dividends right through the recession with only a few able to maintain their
dividends and where none of the companies on the list cut their dividends.

The bottom line is that this list represents a group of strong companies that
are currently on sale. Each of these companies can now be purchased at price
earnings ratios that are in many cases significantly below their earnings justified
levels. This statement relates both to fair valuation on their current and
actual earnings, as well as a fair valuation on their expected future earnings
potential. Therefore, we believe this group of companies offers a three-pronged
opportunity for above-average future total returns at below-average risk. We
expect that each company will benefit in the future from a potential expansion
in their PE ratios coupled with future earnings growth and finally followed
by dividend increases offering a return kicker.

Moving across the columns from left to right, the following table shows each
company's historical normal 15-year PE ratio next to its current PE ratio.
This paints a clear picture of the low valuation we have been discussing. Then
we find each company's dividend yield followed by its estimated 5-year EPS
growth rate based on the consensus of leading analysts following the company.
Next we show each company's market capitalization. Finally, and most importantly,
we list each company's 5-year estimated annual total return calculation.

This total annual return figure is conservatively based on each company achieving
their estimated earnings growth and the market capitalizing their future earnings
at only a stock market average PE ratio of 15. Consequently, we would strongly
argue that these total annual return figures are based on conservative and
achievable assumptions. Dividends are included in this calculation (but not
reinvested) and are assumed to grow at each respective company's estimated
earnings growth rate. Therefore, these high return expectations are a function
of a combination of modest expected earnings growth and significant current
undervaluation.

When Fear is Not Supported by Fact - An Expanded View

To reframe some famous words by Franklin D. Roosevelt, we believe that all
we really have to fear is the fear that lies within ourselves. Regarding matters
of investing, pessimism breeds fear and fear brings low stock prices. With
low stock prices, we can find opportunities for above-average long-term gain
at below-average risk. One of the hot topics breeding pessimism today relates
to the failure of the "Supercommittee" to reach a deal on spending, thereby
prompting an automatic $1.2 trillion in spending cuts.

Although the Defense Department has vowed to fight any future cuts in defense
spending, defense spending cuts are currently on the chopping block. Two of
the companies on our list are blue-chip defense and aerospace companies, L3
Communications Holdings Inc. (LLL) and General Dynamics Corp. (GD). The following
short video shows how both of these quality enterprises have seen their market
values decimated, even though their earnings have remained strong.

Conclusions

There's no denying that the world is currently faced with numerous problems
and challenges. On the other hand, as we pointed out earlier, this is nothing
new. The world has always faced trials and tribulations, and most certainly
there are many new ones to come. But just as we have always been faced with
these issues, we have always been able to meet them head on and overcome any
and all obstacles that we have been faced with. But even more importantly,
within each challenge there has also been accompanying opportunity. And in
most cases, the opportunities tend to dwarf the risks.

The opportunities that we believe our recent challenges are bringing us are
unnecessarily low valuations on some of our highest-quality companies. Yet,
it is a fact that investors are flocking to bonds in droves at precisely a
time when the risk of owning bonds is perhaps the greatest it has ever been.
Interest rates are at historical lows and, therefore, bond prices are at historical
highs. Conversely, dividend yields on good quality dividend growth stocks are
at historical highs because their stock prices are at historical lows. Yet
most investors want to defy the cardinal rule of investing - buy low, sell
high.

Therefore, due to fear, we are concerned that investors are behaving exactly
opposite of how they should be behaving in order to serve their best long-term
interests. To be clear, we believe that investors are eschewing investing in
stocks just when the opportunities for owning them are the best they've been
in decades, while simultaneously, the long-term risks of owning them the lowest.
There is a Warren Buffett quote from his Berkshire Hathaway 1994 annual report
that we never get tired of sharing which eloquently speaks to what we see today:

"We will continue to ignore political and economic forecasts which are
an expensive distraction for many investors and businessmen. 30 years ago,
no one could have foreseen the huge expansion of the Vietnam War, wage and
price controls, two oil shocks, the resignation of the president, the dissolution
of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury
bill yields fluctuating between 2.8% and 17.4%. But surprise-none of these
blockbuster events made even the slightest dent in Ben Graham's investment
principles. Nor did they render unsound the negotiated purchases of fine
businesses at sensible prices. Imagine the cost to us, if we let a fear of
unknowns cause us to defer or alter the deployment of capital. Indeed, we
have usually made our best purchases when apprehensions about some macro
event were at a peak. Fear is the foe of the faddist, but the friend of the
fundamentalist."

The names that we have presented in this article represent what we believe
to be quality companies that can currently be bought at very attractive valuations.
However, we do encourage prospective investors to conduct their own due diligence
before investing in any of them. On the other hand, we will conclude this article
with some additional final words of wisdom from the Oracle of Omaha - "be
fearful when others are greedy, and greedy when others are fearful."

Charles (Chuck) C. Carnevale is the creator of F.A.S.T. Graphs™. Chuck
is also co-founder of an investment management firm. He has been working in
the securities industry since 1970: he has been a partner with a private NYSE
member firm, the President of a NASD firm, Vice President and Regional Marketing
Director for a major AMEX listed company, and an Associate Vice President and
Investment Consulting Services Coordinator for a major NYSE member firm.

Prior to forming his own investment firm, he was a partner in a 30-year-old
established registered investment advisory in Tampa, Florida. Chuck holds a
Bachelor of Science in Economics and Finance from the University of Tampa.
Chuck is a sought-after public speaker who is very passionate about spreading
the critical message of prudence in money management. Chuck is a Veteran of
the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor
Medal.

Disclaimer: The opinions in this document are for informational and
educational purposes only and should not be construed as a recommendation to
buy or sell the stocks mentioned or to solicit transactions or clients. Past
performance of the companies discussed may not continue and the companies may
not achieve the earnings growth as predicted. The information in this document
is believed to be accurate, but under no circumstances should a person act
upon the information contained within. We do not recommend that anyone act
upon any investment information without first consulting an investment advisor
as to the suitability of such investments for his specific situation.